Agri markets to witness dynamic changes

The agricultural commodities markets are set for a dynamic change in 2007.

Though the new year will see consolidation of commodities futures exchanges, tremendous opportunities are expected to open up in the marketing of agricultural products.

Besides, there will be other changes making the agri commodities market dynamic.

Some agencies, other than the Food Corporation of India and the Nafed, will be procuring foodgrains and other agri commodities on behalf of private traders or multinational companies.

The sister concerns of the two leading online commodity exchanges, the MCX and the Ncdex, have already launched procurement operations.

Unlike equities, the spot and the futures markets of commodities are different. The spot markets or the Agriculture Produce Marketing Committees (APMCs) are governed by state governments through the state-owned mandis or APMCs. Online spot markets or spot exchanges have recently begun their operations.

The MCX and the Ncdex will be starting their spot exchanges in the next couple of fortnights in those states, whose governments have amended laws to allow private spot mandis.

These mandis will be online and can provide spot prices at the state level initially. Spot prices at the national level can become a reality once all state governments amend their respective laws.

Currently, no formal spot prices at the state or the national levels are available. Moreover, the APMC prices are very regional in nature and not found reliable either. It is here that new-age spot exchanges will be the best option for farmers getting the best prices for their produces.

Meanwhile, consolidation among regional commodities exchanges will be another big thing. Last year saw the Rajkot Oils and Oilseeds Exchange becoming a subsidiary of the MCX. This year, the Ahmedabad Commodity Exchange is searching for a suitable partner.

In equities, many regional exchanges faced stiff competition after the National Stock Exchange (NSE) started operations and the Bombay Stock Exchange (BSE) went national. Today, regional stock exchanges are virtually non-functional.

The Securities and Exchange board of India (Sebi), the capital market regulator, is in favour of regional exchanges either becoming members of the NSE or the BSE or just shutting shop.

However, the situation is different in the case of regional commodities exchanges. "We want them (regional exchanges) to continue and function. They also have a role to play," the Forward Markets Commission (FMC) Chairman S Sundareshan had recently remarked.

He had said the commodities market regulator is preparing guidelines for regional commodities exchanges to demutualise or go online.

He had further clarified that they could continue to function on the current outcry model. Increasing competition and benefits of multi-commodity trading will result in some consolidation among regional or single commodity exchanges.

Following the foreign investment guidelines for stock exchanges and depositories as well as clearing corporations, the ministry of consumer affairs is likely to announce the foreign investment guidelines for the commodities futures exchanges in the coming months.

This will pave the way for international exchanges to partner with the national online exchanges.

In fact, many international commodities exchanges have signed MoUs with exchanges such as the MCX and the Ncdex and are looking at strengthening their relationships as and when and in whatever way the regulatory framework allows.

The year 2007 will see international commodities exchanges taking equity stakes in the Indian commodities exchanges. Since the MCX is set to launch its IPO during the year, it is likely to be the first exchange to find an equity partner in a foreign commodities exchange. It will also, perhaps, become the first exchange to unlock the value as a commodities exchange.

Meanwhile, the volume of commodities futures trade in the current financial year till date crossed the Rs 25 lakh crore mark and by the year-end, it may touch Rs 35 lakh crore or $800 billion. The volume can rise further.

But, if the government is going to accept the recommendations of the Parliamentary Standing Committee, the full potential of the commodities trade may not be realised. Having said that, the commodities futures crossing the $1 trillion mark in 2007 cannot be ruled out.

The committee, in its recommendations, has barred mutual funds, pension funds and foreign investors from participating in commodities futures. The issue is now the government's call. It has also not favoured index futures, options trading and other derivatives, such as weather futures. But, if these are allowed, they could provide huge liquidity to the market.

Besides, options could be the cheapest instrument for hedging. Weather futures are another dynamic instrument for hedging. But, they may not see the light of day unless the government is firm and in a position to rule over the committee's recommendations.

The year will also see market regulator FMC receiving autonomy and many powers, some of which are not with the other market regulators.